How to Fight Long-Term Unemployment: Lessons from Germany
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IZA DP No. 9134 How to Fight Long-Term Unemployment: Lessons from Germany Alexander Spermann June 2015 DISCUSSION PAPER SERIES Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor How to Fight Long-Term Unemployment: Lessons from Germany Alexander Spermann IZA and University of Freiburg Discussion Paper No. 9134 June 2015 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: [email protected] Any opinions expressed here are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 9134 June 2015 ABSTRACT How to Fight Long-Term Unemployment: Lessons from Germany The number of long-term unemployed in Germany has stagnated at around one million for several years. Despite excellent labour market conditions, the long-term unemployment rate is well above the OECD average. Therefore, the “carrot and stick” principle of Hartz reforms is in clear need of further development. The author proposes an overall concept for preventing and reducing long-term unemployment and long-term basic income receipt. An important element is an activation strategy for long-term unemployed and long-term basic income recipients that implies interim target setting and requires more and better trained case managers in the job centres. JEL Classification: J31, J38 Keywords: long-term unemployment, long-term basic income receipt, Germany, training programs, active labor market policy, activation Corresponding author: Alexander Spermann IZA P.O. Box 7240 53072 Bonn Germany E-mail: [email protected] 1. Introduction The German labour market has changed drastically over the last ten years. Just a decade ago there was mass unemployment with roughly five million unemployed people and low employment rates. Germany was labelled “the sick man in Europe”. Today, unemployment is well below the three million threshold and employment rates are at a record high. Germany has been dubbed a job wonderland and European champion with regard to its labour market (see Rinne/Zimmermann 2013 and Dustmann et al. 2014). Against this backdrop, it is time to reflect on the further development of the basic income system in Germany. It is indeed true that the Hartz reforms, which are considered internationally as the largest labour market reforms in post-war history, led to a clear decline in the number of unemployed and long-term unemployed people; however, the interim reports after five and eight years of the Hartz IV reform (see Koch et al. 2009 and Dietz et al. 2013) clearly show that the problem of long-term unemployment and long-term basic income receipt remains unsolved. Roughly one million people have remained unemployed for longer than one year and therefore are considered long-term unemployed. Approximately three million employable individuals received basic income for about two years or longer and are considered long-term basic income recipients. Note that the 2005 Hartz IV reform as a part of the Hartz reforms refers to the merger of unemployment assistance and public assistance to one means-tested and tax-financed basic income scheme which allowed previous public assistance recipients access to active labour policy instruments. Therefore, the “carrot and stick” principle of the Hartz reforms is in clear need for further development. The paper is structured as follows. In chapter 2, empirical evidence with a focus on long-term unemployment will be summarised following a depiction of long-term 3 unemployment and long-term basic income receipt. Chapter 3 serves to shed light on the practice of “carrot and stick”. In Chapter 4, a differentiated three-pillar concept for preventing and reducing long-term unemployment and long-term basic income receipt will be outlined on the basis of different experiences with Hartz IV over the last ten years. A conclusion to this issue is given in Chapter 5. 2. Long-term unemployment and long-term basic income receipt in Germany In Germany, people who are unemployed longer than 12 months are considered long-term unemployed. Between 2005 and 2011, the number of long-term unemployed people decreased considerably from roughly 1.8 million to roughly 1 million. Since then, the number of long-term unemployed has remained largely unchanged, as illustrated by Figure 1. Figure 1: Unemployed and long-term unemployed in Germany, 2000 to 2014 In January 2015, the number of long-term unemployed totalled 1.074 million. The fraction of long-term unemployment in relation to the total number of unemployed people decreased slightly to 35.4 per cent in comparison with January 2014 (see Federal Employment Agency 2015a). 4 Long-term unemployed receive either tax-financed and means-tested basic income (i.e. Hartz IV) or social security contribution-financed unemployment benefits. More than ninety percent of the long-term unemployed are Hartz IV-recipients. Only almost ten per cent of long-term unemployed receive unemployment benefits. The dynamics behind the stock of long-term unemployed of about one million deserves further analysis. In January 2014, the stock of long-term unemployed was excactly 1.062.484. Throughout the year, 784.738 short-term unemployed became long-term unemployed (inflow) and 809.916 terminated their long-term unemployment spell (outflow) so that the stock number declined to 1.037.306. However, just 25 % of the outflowing long-term unemployed (i.e. less than 200.000) were employed or self- employed and only 16 % participated in education programs. In the event, that they were employed just for one day or took part in job creation schemes for longer than six weeks, the duration of unemployment is reset (see Federal Employment Agency 2015b). As a result, the problem tends to be underestimated. Therefore, figures based on surveys conducted by the OECD are better able to demonstrate the scale of the problem (see Junankar 2011). According to the OECD statistics, Germany is a country with a very high long-term unemployment rate. With a rate of 45%, Germany is ten per cent over the OECD member state average (see OECD 2014). A specific feature of the German Hartz IV basic income system is that recipients have to be able to work at least three hours per day. As a consequence, long-term basic income recipients that are not registered as unemployed (e.g. single parents due to childcare) may receive Hartz IV. In 2013, the annual average of Hartz IV basic income recipients totalled 4.42 million, of which 2.52 million were not unemployed, 1.02 million were short-term unemployed and 881,000 were long-term unemployed. The Public Employment Service defines Hartz IV long-term basic income receipt 5 slightly different: In the same year, 3.123 million were long-term basic income recipients who had been receiving Hartz IV for at least 21 months in the last 2 years. Therefore, the policy relevant group are not just long-term unemployed but the larger group of long-term basic income recipients. Note that there is still a basic income system for disabled people who are not able to work at least three hours per day. Risk factors for long-term unemployment include older age and lack of vocational training. Almost half of unemployed older people over the age of 55 are long-term unemployed, of which more than one fourth has been long-term unemployed for a very long time (more than two years). With respect to vocational training: Almost 52 per cent of all long-term unemployed people have not completed any vocational training (see Federal Employment Agency 2014a). Health issues and family status (couples with children and single parents) also play an important role for the long- term basic income recipients (see Graf 2007, Graf/Rudolph 2009, Dietz et al. 2013, Koller-Bösel et al. 2014). Barriers such as older age and health issues are often present at the same time. Multiple barriers are therefore particularly problematic because the probability of transition to employment is cut by almost half if you add one more risk (see Achatz/Trappmann 2011). Supporting evidence for scarring effects of long-term unemployment comes from a field experiment conducted in the U.S.. Kroft et al. (2013) find adverse effects of a longer unemployment spell i.e. negative duration dependence. Long-term unemployment not only reduces employability and the probability of being employed in the future, but also causes people to become lonely and sick. The loss of a social network through job loss brings about an unexpected shock, which can even cause otherwise confident people to become insecure when applying for jobs for which they are over-qualified. Hundreds of unsuccessful applications lead to feelings of 6 discouragement, worthlessness as well as lack of prospects and even depression (see Winkelmann/Winkelmann 1998, Böckerman/Ilmakunnas 2009, Knabe et al.